It is well-established that clauses that seek to restrict release of a subcontractor’s retention money until release of retention under the head contract, are void as a ‘pay when paid’ provision. However, is the situation different for security in the form of a bank guarantee? Or where release of subcontract retention is based on the happening of a statutory event that coincides with release of retention under the head contract?
‘Pay when paid’ provisions
Under section 16(1) of the Building and Construction Industry Payments Act 2004 (Qld) (the Act) a pay when paid provision is void. Under s16 (2) of the Act – pay when paid means a provision of the contract:
- that makes the liability of one party (the first party) to pay an amount owing to another party (the second party) contingent on payment to the first party by a further party (the third party) of the whole or any part of that amount; or
- that makes the due date for payment of an amount owing by the first party to the second party dependent on the date on which payment of the whole or any part of that amount is made to the first party by the third party; or
- that otherwise makes the liability to pay an amount owing, or the due date for payment of an amount owing, contingent or dependent on the operation of another contract.
The Act also provides that:
An amount owing, in relation to a construction contract, means an amount owing for construction work carried out or undertaken to be carried out, or related goods and services supplied or undertaken to be supplied, under the construction contract.
The Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) also previously made a ‘pay when paid’ provision void, however, the provision was repealed in 2004.
Retention
A clause that provides for a subcontractor’s retention to be withheld until a head contractor satisfies a requirement under the head contract will generally be void under the ‘pay when paid’ provision of the Act, unless one of the following exceptions applies:
- where there is more than one method of releasing retention under the head contract such that it cannot be regarded as ‘contingent’; or
- where the release date is grounded in statute rather than contract.
Recently, in Maxcon Constructions Pty Ltd v Vadasz (No 2) [2017] SASCFC 2 (Maxcon), the Supreme Court of South Australia held that a clause that a piling subcontractor’s retention could only be released once the head contractor had obtained a certificate of occupancy for the building (the SA equivalent of a certificate of classification) was valid and did not breach the pay when paid provisions of the Act in that State. The Court held that contracts which make the release of retention dependent on the occurrence of an independent event, will not offend the pay
when paid provisions of the Act in South Australia. This is to be contrasted with clauses that merely make the release of retention to the subcontractor ‘back to back’ with the release of the head contractor’s retention from the principal.
Security in the form of a bank guarantee
Unlike retention, security in the form of a bank guarantee, bond or other “valuable instrument” is not “an amount owing for construction work carried out”, rather it is for securing the performance of the contract (s67A of the QBCC Act). So a bank guarantee or a bond is not excluded by section 16 of the Act.
In Avopiling (NSW) Pty Ltd v Mernard Bachy Pty Ltd [2012] NSWSC 1466, the decision of an adjudicator to order the return of a bank guarantee was overturned by the NSW Supreme Court, on the basis that the adjudicator only had jurisdiction to determine the “amount owing “by the principal to the contractor, and therefore did not have the jurisdiction to order the return of the bank guarantee which was not such a sum.
The take away
- Release of retention under a subcontract that is based on release of retention under the head contract is void;
- Release of security under a subcontract that is based on release of security or retention under a head contract is not void; and
- Release of retention under a subcontract that is based on the happening of a statutory or non-contingent event under the head contract will probably not be void.
Key contacts:
